The Pay and Pension Commission (PPC) of the Finance Division, Government of Pakistan, is planning and drafting a revision of the pension policy, as the cost of pension is increasing. The government has been providing pensions to employees since 1972 and has had many opportunities over the past five decades to analyze and revise the policy, if at great cost.
However, the government in Pakistan always bothers itself at the eleventh hour, when everything is out of hand and a small amendment can cost us much more than usual.
In this recent development, the government has decided to penalize all those employees who are ready for early retirement. It says, “A Government employee may opt for early retirement after putting in 25 years of service; however, the employee shall be liable to a penalty of 3% per year reduction in gross pension with effect from retiring year till the age of superannuation”.
In Pakistan’s public sector, retirement pension is payable when an employee is allowed to retire after completing 25 years of service; then the government pays them a pension. A retirement pension is admissible to a government servant who, in principle, is allowed to retire at the age of 60 years. Retiring pension policy encourages employees to transfer their services and skills to any other emerging industry or developing sector of the country. However, after this amendment, the government is trying to control exit from the market, which will no longer be free. The employee will be liable to pay a loss of three percent per annum of the total pension from the year he retires till the age of superannuation, which is 60.
While the government’s aim through this amendment is to reduce the cost of pension, in this case it is quite the opposite. Hiring and pensioning old people is much more expensive than letting them go and hiring fresh and modern minds with a new less expensive policy for pensions. The price the public sector must pay is not only financial but also in productivity, efficiency, labor mobility and skills shortages. The public sector in Pakistan is the oldest and has the most experienced employees in the country, as these jobs are permanent.
After completing 25 years in the same office and sector, one will reluctantly leave the position and switch to higher paying and more challenging jobs. The proposed amendment would cause a lack of mobility which could harm the overall efficiency of the labour market. The public sectors have the most experienced and skilled employees with vast amounts of knowledge which will be more beneficial for the emerging industries which require these skills and knowledge. Mobility in the labour market will allow them to use their skills in the required industry and achieve greater market efficiency. This will bring innovation and growth to the overall market, as the public sector will get some young and innovative minds and emerging industries will have experienced people.
The policy may reduce some of the financial costs but may also reduce overall market efficiency due to reduced labour mobility and a less flexible innovative workforce will cause damage. It is paramount for policy makers to carefully reflect on the potential outcomes and consider them with a wish list to ensure that policy is in balance with broader economic and employment goals.
This amendment is an incentive for government employees to remain in office regardless of performance. Even if an employee has zero motivation and is no longer effective in his or her role, he or she will still hold on to the office for fear of declining pension benefits, a scenario that likely results in a less productive workforce. Another possible consequence is an ageing workforce, which is less productive and innovative than a younger workforce, particularly in the case of Pakistan, where promotion is based on years spent in the field rather than performance and competence. The proposed policy has great potential to develop the concept of pension entitlement, which is an incentive and not an entitlement. This privilege among employees will lead them to remain in positions regardless of achievements with less sense of responsibility for exceptional performance and service to the nation.
In a country like Pakistan where people join government jobs only on the incentive of pension, this policy is blessed. As we all know that most government jobs are distributed on a political basis for political purposes. Allowing employees to remain in office for life is not very reasonable but a huge burden on the government. Instead of amending the pension policy, the government should amend the retirement and hiring policy, which will save the government a lot. The government should revise the policies based on the performance and competence of the employees. Say goodbye to underperforming employees with a letter of thanks policy instead of keeping them for long periods of service. Pension eligibility should not be based on the years they have spent, but on the goals they have achieved.
The government may be making this amendment with the pure intention of reducing the cost of pensions and creating financial ease for the public sector, as the government has the right to. But the government should consider the overall impact of the amendment, both negative and positive consequences. This policy of cost cutting not only has financial implications but also affects the overall labour market and economic performance.
The policy may reduce some of the financial costs but may also reduce overall market efficiency due to reduced labour mobility and a less flexible innovative workforce will cause damage. It is paramount for policy makers to carefully reflect on the potential outcomes and consider them with a wish list to ensure that policy is in balance with broader economic and employment goals.
